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India International Centre Versus Asstt. Director of Income-tax, (E) , Inv. Cir. (1) , New Delhi.

2015 (5) TMI 515 - ITAT DELHI

Revision u/s 263 - AO failed to examine the applicability of 1st and 2nd proviso of Section 2(15) of the Income Tax Act read with 3rd proviso to Section 143(3) and provisions of Section 13(8) although neither 3rd proviso to Section 143(3) nor Section 13(8) were on statute book when AO. passed the assessment order - income not being returned by assessee in its incometax return or in form 10BB - Held that:- Objection of ld. DIT(E) as regards the income not being returned by assessee in its incomet .....

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g income by way of carrying on of trade or commerce and claiming the same as exempt in the garb of pursuing the alleged charitable object of general public utility. This proviso never meant to deny the exemption to those institutions, where the predominant object is undeniably a charitable object and in order to achieve the same incidental activities, essential in the given circumstances, are carried on.In view of the above discussion we hold that the proviso to section 2(15) is not at all appli .....

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osition of membership clearly exemplifies the real intention of assessee. We fail to understand as to how the hostel accommodation provided to various invitees could be considered as a commercial activity. Before any activity can be branded as being in the nature of trade or commerce, the AO has to demonstrate the intention of parties Backed with facts and figures of carrying out activities with profit motive. Mere surplus from any activity, which undisputedly has been undertaken to achieve the .....

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Director General of incomew Tax [2015 (1) TMI 928 - DELHI HIGH COURT].Thus in the facts and circumstances of the present case, the ld. DIT(E) was not justified in initiating revisionary proceedings u/s 263 of the Act. - Decided in favour of assessee. - ITA no. 3124/Del/2014 - Dated:- 11-5-2015 - SHRI S.V. MEHROTRA AND SHRI C.M. GARG, JJ. For The Appellant : Shri Pradeep Dinodia, Shri R.K. Kapoor CA For The Respondent : Shri R.I.S. Gill CIT(DR) ORDER PER S.V. MEHROTRA, A.M:- This appeal, by the .....

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E) in short), examined the records and noticed that as per income and expenditure account, total income of the assessee had been shown at ₹ 2640.96 lakhs. Out of this, ₹ 783.18 lakh had been considered for computation of income for charitable activity u/s 10(23C)(iv) and remaining amount had been claimed exempt on the principle of mutuality. Ld. DIT(E) examined the accumulation chart and income and expenditure account and concluded that major activities of the assessee revolved aroun .....

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is read with first objective viz. to promote understanding and amity between the different communities of the world by undertaking or promoting the study of their past and present cultures, by disseminating or exchanging knowledge thereof, and by providing such other facilities as would lead to their universal appreciation . He pointed out that in the first category there were general citizen of the world whereas beneficiaries in the second category were exclusive selected members of the society .....

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ey did not fulfill the criteria to come under the principle of mutuality. She, accordingly, issued a notice u/s 263 on 11-3-2014, which was further amended by notice dated 28-3-2014, requiring the assessee to show cause as to why the order passed by the AO may not be treated as erroneous and prejudicial to the interests of revenue and accordingly be set aside. 2.2. The assessee filed detailed replies vide its letter dated 24-3-2014, 29-3-2014 and 31-3-2014, which have been reproduced extensively .....

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xempt with reference to section 11,12 and 13 though the assessee had submitted report in form no. 10BB only with respect of part income of ₹ 7,90,08,192/- The assessee s claim of exemption with respect to balance income has thus not been examined at all. Further, in view of the discussion as above, assessee s claim of exemption either u/s 10(23C)(iv), u/s 11 or under the principle of mutuality do not appear to be tenable. Therefore, entire surplus of ₹ 290.70 lacs to be exempt was to .....

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urrent assessment year were ₹ 2640.96 lacs/ 2348.19 lacs/ ₹ 292.17 lacs respectively. In its return filed in ITR 7, the assessee had shown only income of ₹ 7,90,08,192/- from other sources and claimed the same to be exempt u/s 10(23C)(iv). Both the return of income as well as the form no. 10BB were silent on balance income. (b) The exemption u/s 10(23C)(iv) was subject to fulfillment of conditions laid down in the order notifying the assessee u/s 10(23C)(iv). The assessee s act .....

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line, was not tenable. (d) As regards the assessere s claim that income was not taxable income, being derived from mutual concern, she observed that assessee had claimed that partly income was covered by the provisions of section 10(23C)(iv) read with sec. 2(15) and partly by principle of mutuality. She observed that an assessee could have income from different heads or income from different sources, but it could not have its income and expenditure for the same sources apportioned on the basis o .....

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e in the activities of the society. Thus, there was no complete identity between the contributors and participators and, therefore, the assessee could not be considered to be covered by principle of mutuality. 3. Ld. counsel for the assessee referred to the condensed grounds of appeal and submitted that the assessee has assailed the order of ld. DIT(E) on following grounds: 1. That the Ld. DIT (Exemption) has grossly erred in law and on the facts of the appellant's case in holding that the o .....

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3) nor Section 13(8) were on statute book when AO. passed the assessment order. 4. That the Ld. DIT (Exemption) has grossly erred in holding that provisions of Sections 11, 12, 13 and Section 10(23C)(iv) of the Income Tax Act are not applicable to the facts of the appellant in spite of the fact that registration u/s 12A, 80G and 10(23C)(iv) remain intact. 5. That the Ld. DIT (Exemption) grossly erred in law in holding that the activities such as accommodation, food and beverages to the members o .....

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ities of the assessee had to be seen in totality and the assessee cannot be allowed to compartmentalize its activities and income arising there from under charitable activities and mutual activities. 8. That the learned Director of Income-tax (Exemptions) has erred in holding that the AO has failed to bring to tax the entire surplus of ₹ 292.70 lakhs. 9. That each ground is independent of and without prejudice to the other grounds raised herein . 3.1. Ld. counsel submitted that the assesse .....

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e included providing of services such as accommodation, food and beverages on chargeable basis and, therefore, such activities were caught within the mischief of proviso 1 & 2 to section 2(15) read with third proviso to section 143(3) and section 13(8) of the I.T. Act. 3.2. Ld. counsel submitted that assessment was completed u/s 143(3) of the Act on 26-12-2011, whereas third proviso to section 143(3) as well as section 13(8) of the I.T. Act were introduced by the Finance Act, 2012 with retro .....

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for the proposition that when assessment order is passed based on the law prevalent at the time of assessment order, the same cannot be revised u/s 263. 3.3. Ld. counsel further submitted that the AO had issued a questionnaire in course of assessment proceedings dated 23.8.2011 and had raised specific queries vide question no.2 and question no.13 on the applicability of the provisions of section 11, 12 and 13 read with sec. 2(15), in view of the latest amendment. He pointed out that in the quest .....

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CIT vs. Sunbeam Auto Ltd., 332 ITR 167 (Del.) - CIT vs. Ani! Kumar Sharma, 335 ITR 83 (Del.) - CIT vs. Gabriel India Ltd., 203 ITR 108 (Born.) - CIT v. Kanda Rice Mills, 178 ITR 446 (P&H) 2013- TIOL-761-HC-DEL 3.4. He further pointed out that similar enquiries were also made by the CBDT while notifying the Society u/s.10(23C)(iv) of the I.T. Act and on only being satisfied, it had notified the assessee society as an eligible entity u/s.10(23C)(iv) of the I.T. Act. Therefore, it cannot be sa .....

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following decisions: - Malabar Industrial Co. Ltd. vs. CIT, 243-ITR-83 (SC) - CIT vs. Green World Corn., 181 Taxman - 111 (SC) 3.6. Ld. counsel further submitted that in the initial notice or in the revised notice u/s 263, ld. DIT(E) never raised any issue on the applicability of third proviso to section 143(3) or section 13(8) or first proviso to section 2(15), but in her order, she relied upon these provisions only. Ld. counsel pointed out that the basis of order has to be the same as in the s .....

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urse is different than what is required u/s. 2(15) of the I.T. Act. He relied on following judgments for this proposition - ICAI vs. DGIT(Exemptions), 347 ITR 99 (Del); - DIT(Exemptions) vs. C.A. Study Circle, 347 ITR 321 (Mad.); - Tolani Education Society vs. DIT(Exemptions), (2013) 259 CTR (Born.) 26 - Bureau of Indian Standards v. DGIT (Exemption), 358 ITR 78 (Del.); - ICAI v. DGIT (Exemptions), 358 ITR 91 (Del.) - DIT (Exemption) v. Sabarmati Ashram, 362 ITR 539 (Guj.) - Council for the Indi .....

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id or alleged to be generating any surplus. The surplus, if any, had resulted only because of interest income being earned by the Society on the accumulated funds of earlier years. 3.9. Ld. counsel submitted that the assessee s case is squarely covered by the decision of Hon ble Delhi High Court in the case of India Trade Promotion Organisation v. D.G. of Income Tax (Exemptions) and others, wherein the Hon'ble Delhi High Court, while upholding the constitutional validity of the first proviso .....

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y other object of general public utility". 3.10. Ld. counsel pointed out that there is no change in the objects or in the activities of the centre for the last five decades or more. Therefore, the rule of consistency has to be applied. For this proposition he relied on following decisions: - Dy. Director of Income Tax Vs. Shanti Devi Progressive Educations Society [2012] 340 ITR 320 (Delhi). - Excel Industries SC-2013- TIOL-52-SC-IT 3.11. As regards the objection raised by ld. CIT on accoun .....

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is born from interest income earned on FDRs. He pointed out that assessee incurred loss from hostel activities. Therefore, there is no question of any trade or business being carried out by assessee. The whole object is to disseminate knowledge for uplifting the social consciousness of the society in general. 4. Ld. CIT(DR) referred to the assessment order and pointed out that there could not be any short/ non-speaking order as is the present one, which has been passed without any application of .....

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ed the rival submissions and have perused the record of the case. At the outset we may point out that as far as the objection of ld. DIT(E) as regards the income not being returned by assessee in its incometax return or in form 10BB is concerned, the same was claimed as exempt on account of concept of mutuality, as in earlier years and, therefore, there was no basis for the AO to take any contrary view on the same. Accordingly, the proceedings u/s 263 initiated by ld. DIT(E) on this count is not .....

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hall be included in its total income of the previous year if the provisions of the first proviso to clause (15) of section 2 become applicable to such trust or institution in the said previous year, whether or not any approval granted or notification issued in respect of such trust or institution has been withdrawn or rescinded. 6.2. Prior to such insertion, the position of law was like this. Section 2(15) defined the charitable purpose . This is an inclusive definition and, therefore, in view o .....

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ts and gains, then the said business was only incidental to the attainment of its main object. However, after application of proviso to section 2(15), by insertion of 17th proviso to section 10(23C) by Finance Act, 2012 with retrospective effect from 1-4-2009, the ambit has considerably been widened and if an assessee is carrying on any activity which is in the nature of trade, commerce or business then the assessee cannot be said to be carrying on charitable activities. In view of changed legal .....

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and since the notification remained in force, in any view of the matter, the invocation of section 263 by ld. DIT(E) was not justified in view of the decision of Hon ble Supreme Court in the case of Max India Ltd. (supra), wherein it has been held as under:- We find no merit in the said contentions. Firstly, it is not in dispute that when the order of the Commissioner was passed there were two views on the word "profits" in that section. The problem with section 80HHC is that it has b .....

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, 1997, in purported exercise of his powers under section 263 of the Income-tax Act. 6.4. Further we find that 263 proceedings initiated by ld. DIT(E) on the ground that there was no application of mind by AO cannot be sustained because vide questionnaire dated 23-8-2011, the AO had issued notice u/s 142(1) and had required the assessee as under: 2. Note on the activities of the trust in AY 2009-10, Explanation along with documentary proof to justify that these activities were charitable as per .....

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ter part this order. Therefore, this cannot be said that there was non application of mind by AO. We further find considerable force in the submission of ld. counsel for the assessee that AO had taken one of the possible views after considering the assessee s reply and, therefore, 263 proceedings could not be initiated against the assessee. Therefore, it cannot be said that AO s order was in any manner erroneous or prejudicial to the interests of revenue. 6.8. However, since detailed arguments h .....

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NTERNATIONAL CENTRE Note on Catering Facilities at the Centre Catering facilities are provided in the Centre for members who come to the Centre or stay in the Centre and attend the discourses, conferences, seminars, lectures. The Centre has two dining halls and two Lounges. The dining hall operates for breakfast, lunch and dinner. The lounge provides variety of snacks, tea coffee and soft drinks. In the Dining Hall of the Main Centre, a Member can book a table for maximum of 8 persons including .....

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lection of donation or any commercial activity is not permitted. 4. Live band, Marriage Ceremonies, Children's parties or any another function where rituals involving pendit, phera, havan etc. are not permitted. 5. Meeting or political, Religious nature and AGM are not permitted. 6. It may not be out of place to mention here that the notice has also been granted exemption from income tax under sub clause (iv) of clause (23C) of Section 10 of Income Tax Act. The Kitchen and the dining hall ar .....

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e the outer Verandah of the Lounge in the Main Centre. In the Annexe Lounge, children below 8 years of age accompanying members are allowed to avail of catering facilities only during lunch hours on Saturday, Sunday and other Public Holidays between 12.30pm to 2.30 pm. 4. Tables are not allowed to be joined in any catering outlets. 5. Use of Cell Phones is not permitted in the Dining Hall, Lounge. Cell Phone may kindly be kept in Vibration mode. 6. Members are requested to speak in a manner that .....

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has been so held right from its inception year after year. There is absolutely no change in the objects or the activities of the Centre right from its inception. Hostel services are predominant to sub-serve the main objective of the Centre i.e. organizing a very large number of programmes throughout the year which are open to the general public, free of cost, the price of which is inestimable. The activity of hostel provides basic amenities to all the invitees in the seminars, cultural and othe .....

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er bodies with cognate objectives, as well as, non- members, specially invited to participate in the activities of the Society", We give herein below a resume of the activities of the Centre. The Centre organizes very large number of programmes throughout the year, which included seminars, talks, discussions, music, dance, dance dramas, documentary films, art exhibitions, feature films etc. Of these roughly 50% can stated to be in the domain of academic and intellectual activities in terms .....

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boration with number of cultural, academic, intellectual institution in the country, In addition to what the IIC and our collaborator organize, the Centre also makes its facilities available to members and their guests for conducting programmes of only academic, intellectual or cultural category of functions. 1500 programmes in a year are organized by members and their guests providing academic discussion contributing to the inteJ!ectual thought in the country and also organizing number of cultu .....

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rmation system or reflect in the accounts as to which or how many members attend which programmes like seminars or cultural events. The programmes always need not necessarily be in the IIC, like nominees of Universities attending conference in a number of institutions in Delhi. As per the rules these members are entitled to stay. That IIC is a centre for promotion of intellectual and cultural activities can be seen when we compare it with other institutions. This is because the Centre is geared .....

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promote, understanding and amity between different communities of the world by undertaking or promoting study of their past and present culture, by disseminating or exchanging knowledge thereof, and to provide facilities for undertaking, organizing and facilitating study courses, conferences, seminars, lectures and research on various matters in order to achieve these objects and to provide facilities and also for establishing and maintaining libraries and undertaking such publications the asses .....

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e could not be achieved. Therefore, merely because incidental income was earned by assessee society for achieving its dominant object from providing hostel and catering activities, it cannot be said that the assessee was doing trade or business as contemplated under proviso to section 2(15). The centre had to necessarily charge for the hostel, catering and use of such facilities from members/ participants since it had to recover cost and at the same time have enough funds to carry out the charit .....

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ly the second category i.e. giving of hostel, catering etc. that the assessee s activities are caught within the mischief of second proviso to section 2(15). It is also not the case of ld. DIT(E) that there was no free access to the general public for programmes such as dance, music, seminars etc. In its reply the assessee had also pointed out that there were number of occasions when the centre did not charge institutions for holding their programmes such as lectures, discussions or seminars etc .....

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n development means etc. through conferences, lectures etc. It was further pointed out before AO that even while charging the members, there was no commercial motive in fixing the rates. The rates were nowhere near the commercial rates and were generally fixed to recover the cost and cost of activities to run the centre. These activities could not be treated in the nature of trade or commerce. 6.13. As regards hostel accommodation, there were number of rooms and guidelines for hiring of the acco .....

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arious newspapers highlighting some of the special programmes conducted by the centre. 6.14. As regards ld. DIT(E) s objection with regard to the membership of the centre, the assessee had pointed out before the AO itself that individual membership was open to all persons of India or foreign origin. Rule 4(A) of Rules & Regulations provides qualification for membership. There are several categories for members, as reproduced below: 4. Qualification for Membership A. Individual membership of .....

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of the Centre and were enrolled as such. (c) Life Members Life Members are persons of high attainment in education, science, culture, art or other areas of public activity who are admitted as such. (d) Members Members are persons in the fields of academia, art, culture, science, technology, sports or those engaged in public or professional functions and activities and are admitted as such in accordance with the decisions taken by the Board in this behalf. (e) Associate Members Associate Members .....

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ted as such in accordance with the decisions taken by the Board in this behalf Provided always that no person shall be eligible for admission under Rule 4(c) to (f) unless he/she has completed 25* years of age at the time of applying for enrolment. Provided further that an applicant for individual membership, other than Temporary membership, should be duly proposed and seconded by two individual members (other than an Associate, Overseas Associate, Short Term Associate and Temporary Member), one .....

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ating knowledge in various fields to public at large. 6.16. The assessee also pointed out that the members are presently from all over the world and about 30% of members are outside the Delhi NCR region. 6.17. From the detailed submissions of assessee, reproduced earlier, which have not been controverted by department, we fail to understand as to how these activities can be said to have an iota of commercial/ trade colour. The dominant object of the assessee is definitely for the well being of p .....

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strate the intention of parties Backed with facts and figures of carrying out activities with profit motive. Mere surplus from any activity, which undisputedly has been undertaken to achieve the dominant object, does not imply that the same is run with profit motive. The intention has to be gathered from circumstances which compelled the carrying on an activity. In the present case, ld. counsel has clearly demonstrated that surplus was generated from interest income and not from catering or host .....

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r to achieve the same incidental activities, essential in the given circumstances, are carried on. 6.19. In view of the above discussion we hold that the proviso to section 2(15) is not at all applicable in the present case and, therefore, ld. DIT(E) was not at all justified in invoking the proceedings u/s 263. 6.20. Further we find that the assessee s case is squarely covered by the decision of Hon ble Delhi High court in the case of India Trade Promotion Organization Vs. Director General of in .....

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ion whatsoever which would qualify for the exemption u/s 10(23C)(iv) of the Act. And, the said provision would be rendered redundant. This is so, because, if the institution had no income, recourse to Section 10(23C)(iv) would not be necessary. And, if such an institution had an income, it would not, on the interpretation sought to be given by the revenue, be qualified for being considered as an institution established for charitable purposes. So, either way, the provisions of Section 10 (23C)(i .....

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amine as to what is the dominant activity of the institution in question. If the dominant activity of the institution was 'not business, trade or commerce, then any such incidental or ancillary activity would also not fall within the categories of trade, commerce or business. It is clear from the facts of the present case that the driving force is not the desire to earn profits but, the object of promoting trade and commerce not for itself, but for the nation - both within India and outside .....

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he Constitutional validity of a provision and, in doing 50, the provision in' question may never to be read down; ++ the introduction of the proviso to Section 2(15) by virtue of the Finance Act, 2008 was directed to prevent the unholy practice of pure trade, commerce and business entities from masking their activities and portraying them in the garb of an activity with the object of e general public utility. It was not designed to hit at those institutions, which had the advancement of the .....

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ly and in absolute terms. It has to take colour and be considered in the context o. Section 10(23C)(iv) of the Act. It is also clear that if the literal interpretation is given to the proviso to Section 2(15) of the Act, then the proviso would be at risk of running fowl of the principle of equality enshrined in Article 14 of the Constitution India. In order to save the Constitutional validity of the proviso, the same would have to be read down and interpreted it the context of Section 10(23C)(iv .....

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